“Disney in Asia, Again



CASE

STUDIES

No. 26 March 2002

Disney in Asia, Again?

by

Raymond H. Lopez, Ph.D.

Professor of Economics and Finance

Lubin School of Business

Pace University

DISNEY IN ASIA, AGAIN?

by

Raymond H. Lopez, Ph.D.

Raymond H. Lopez is Professor of Finance at the Lubin School of Business of Pace University.

INTRODUCTION

“We could be getting close to the time for a major Disney attraction in the world’s most populous nation.” [i]

“I am completely confident that Chinese people love Mickey no less than they love a Big Mac.” [ii]

Early in 1999, Michael Eisner, CEO of The Walt Disney Company, voiced his opinions concerning potential markets for his firm’s entertainment products and services. A major thrust for the new millenium would be development in Asia.

The firm had now achieved a certain level of experience with owning and/or managing assets and operations outside the United States. They had two competing models that would be utilized to analyze and ascertain the financial and operating structure of their next foray into the global business arena.

Their first experience was Tokyo Disneyland. Modeled after Disneyland in California and located six miles from downtown Tokyo, the park opened in 1983 and was literally a cultural and financial success from its start. However, not all of the potential financial benefits had accrued to Disney shareholders, since the facility was entirely owned by The Oriental Land Company. Disney had generated a large and growing stream of fee income, but had not participated as an owner. The architect of Disney’s strategy was Ron Miller, CEO, son-in-law of Walt Disney, and leader of a very conservative management team.

By the time a development decision for Western Europe rolled around in 1987, Michael Eisner was Disney’s CEO. The new management team was convinced of the benefits of ownership. In negotiating with the governments’ of Spain and France, Disney sought to maximize their ownership interest in any theme park operation. This was accomplished with their 49 percent ownership of Euro Disney, which opened east of Paris in 1992.

Attendance and operating income in France were less than anticipated and a major restructuring of the Euro Disney operating company was effected in 1994. Cultural challenges, as well as a European recession in the early 1990s, resulted in less than expected success of the park and its related hotels and facilities. Renamed Disneyland Paris early in 1994, and with enhanced performance, the Disney European experience

finally began to pay off for this facility, which, by the late 1990s, was the largest theme park in Western Europe!

With these two, quite different, experiences in operating a large theme park and resort facility outside of the continental United States, the Eisner management team was ready to move into China. Two locations were “in the running” early in 1999, representing quite different operating and financial strategies and structures. Either Hong Kong or Shanghai would likely be the site of the next Disney theme park. This was the challenge faced by the Disney management team, with a target decision date of June 1999.

THE WALT DISNEY COMPANY

The Walt Disney Company, together with its subsidiaries, was a diversified international entertainment organization with operations in three major business segments. From humble beginnings at The Disney Brothers Studio, founded in 1923 by Walter E. and Roy O. Disney, the firm had developed into a global powerhouse in the leisure services industry.[iii]

Multimedia Production

The company produced and acquired line-action and animated motion pictures for distribution to the theatrical, home video, and television markets. The firm also created original television programming for the network and first-run syndication markets. Disney distributed its filmed products through its own distribution and marketing companies in the United States and most foreign markets.

The company licensed the name “Walt Disney,” as well as the company’s characters, visual and literary properties, songs, and music to various consumer manufacturers, retailers, show promoters, and publishers throughout the world. The firm also engaged in direct retail distribution principally through the Disney Stores, and published books and magazines for the general public in the United States and European markets. In addition, Disney produced audio and computer software products for the entertainment market, as well as film, video, and computer software products for the educational marketplace.

Buena Vista Internet Group (BVIG) coordinated the company’s Internet initiatives. BVIG developed, published, and distributed content for narrow-band online services, interactive television platforms, interactive web sites, including , Disney’s Daily Blast, , ABC , and the Disney Store Online. The Disney Store Online offered Disney-themed merchandise to customers over the Internet.

Television Broadcasting

The company operated the ABC Television Network, which had affiliates providing coverage to U.S. television households. Disney also owned television and radio stations, most of which were affiliated with either the ABC Television Network or the ABC Radio Network. The company’s cable and international broadcasting operations were principally involved in the production and distribution of cable television programming, the licensing of programming to domestic and international markets and investing in foreign television broadcasting, production, and distribution entities. Primarily domestic cable programming services were operated through subsidiary companies and joint ventures. These companies included ESPN, the A & E Television Network, Lifetime Entertainment Services, and E! Entertainment Television. The company also provided programming and operated cable and satellite television programming services for the Disney Channel and Disney Channel International.

Theme Parks and Resorts

This division of the company operated the Walt Disney World Resort ® in Florida, and Disneyland Park ®, the Disneyland Hotel, and the Disneyland Pacific Hotel in California. The Walt Disney World Resort included the Magic Kingdom, Epcot, Disney-MGM Studios, and Disney’s Animal Kingdom; thirteen resort hotels; and a complex of villas and suites; a retail, dining, and entertainment complex; a sports complex; conference centers; campgrounds; golf courses; water parks; and other recreational facilities. In addition, the Theme Parks and Resorts division operated Disney Cruise Line from Port Canaveral, Florida. The company’s first ship, Disney Magic, commenced operations in July of 1998 and a sister ship, Disney Wonder, was launched in 1999.

Disney Regional Entertainment designed, developed, and operated a variety of new entertainment concepts based on Disney brands and creative properties, operated under the names Club Disney, ESPNZone, and Disney Quest.

The company earned royalties on revenues generated by the Tokyo Disneyland ® theme park near Tokyo, Japan; a facility owned and operated by an unrelated Japanese corporation, Oriental Land Development. The company also had a 39 percent ownership stake in Euro Disney S.C.A., a publicly-held French entity that operated Disneyland Paris.

The company’s Walt Disney Imagineering unit designed and developed new theme park concepts and attractions, as well as resort properties. Disney also managed and marketed vacation ownership interests in the Disney Vacation Club. Included in the Theme Parks and Resorts division were the company’s National Hockey League franchise, The Mighty Ducks of Anaheim, as well as an ownership interest in the Anaheim Angels, a Major League Baseball team.

The Walt Disney Company had a long history of successfully managing theme parks. Not only do they operate as stand-alone investment projects; they may also be thought of as valuable marketing venues for other aspects of Disney’s business. For example, from two years before Disney in Anaheim, California, opened to five years after, sales of company merchandise in the United States increased 100 percent. In the case of Tokyo Disneyland, a comparable time period produced a 200 percent increase in merchandise sales. After Disneyland Paris opened, merchandise sales in Europe over a comparable period grew by 1000 percent. China and other Pacific Rim nations had a sales potential that was just as inviting.

DISNEY AND CHINA IN THE 1990s

Relations between the Disney Company and the government of China had not been particularly tranquil in recent years. In late 1996, China’s leaders vehemently objected to Disney’s plans to distribute the movie ‘Kundun,’ Martin Scorsese’s film that told the story of Tibet’s exiled spiritual leader, the Dalai Lama, and China’s brutal occupation of that nation. Following the film’s release in 1997, China’s leaders made threatening statements concerning Disney’s future in their markets.

Disney held firm on its position on the movie. “Disney’s potential business in China is infinite. But Disney has to decide whether it wants to facilitate business or stand for free speech.”[iv]

Another Disney film, the animated movie ‘Mulan,’ about a legendary Chinese woman-warrior, proved to be a box-office disappointment in China. It was claimed that the film’s Chinese characters looked too Western. In addition, pirated video versions of the film were available in China before the film arrived in theaters.[v]

Not all of Disney’s relationships with China were negative however. The liberalization of China’s markets had generated benefits for the firm. ‘The Lion King’ had brought in almost $4 million in 1996 and the soundtrack had sold 1.4 million copies.

POTENTIAL OF THE ASIAN MARKET

Building and investing in a multi-billion dollar theme park would represent another major, long-term commitment for The Walt Disney Company. Therefore, much research and planning were involved in this decision. In addition to the attractiveness of each of the remaining cities, Shanghai and Hong Kong, the market characteristics of the demand for theme park experiences by the Chinese people would have to be carefully evaluated.

Although the success of the Tokyo Disney theme park would strengthen the case for another facility in Asia, other data and experience brought up additional questions. Between 1993 and 1998, more than 2000 theme parks had been opened in China, developed and financed by both domestic and foreign investors. Disney management was convinced that a huge, child-loving populace would support a lively theme park business. Instead, many projects were swamped by excessive competition, poor market projections, high costs, and relentless interference from local officials.

Several hundred parks had already been closed, due to poor quality of service and less than exciting entertainment experiences. Instead of increasing, consumer enthusiasm for theme parks had dwindled. [vi] These parks had also been unsuccessful at attracting a significant number of customers from other Asian nations.

Other factors affecting the viability of an Asian theme park in China had to be evaluated. The Chinese economy was one of the fastest growing during the 1990s and was expected to experience significant growth well into the new millenium. At least one-third of the nation’s 1.2 billion people resided in the rapidly developing coastal region, the industrial heartland of the nation. The largest and most developed population centers were located in this area, where an awakening and growing middle class lived and worked. Their leisure time had increased significantly and was expected to continue to outperform the rest of the nation. With their income levels approaching $1,000 per month, China’s middle class families were a prime target audience for Disney theme park experiences.

The Chinese had a cultural disposition toward pampering children, which had been accentuated by the nation’s one-child per couple policy. Although many theme parks in China had not been successful, it was still generally believed that an exciting experience of high quality would attract visitors to a park. A mundane experience would be unlikely to spark interest in a second visit. Based on the repeat visitors at every other Disney theme park, management was quite confident that they would be successful in attracting Chinese visitors not only the first time, but also the second, third, and fourth times.

INTERNATIONAL THEME PARKS AND RESORTS

THE DISNEY EXPERIENCE

Foreign visitors had always been an important component of Disney’s U.S. theme parks in Anaheim, California, and Orlando, Florida. In 1979, the firm’s management decided to take their park experience to the international community, an unprecedented move in its history.

Tokyo Disneyland

This park, located on landfill in Tokyo Bay, was only 6 miles from downtown Tokyo. In keeping with the traditional conservative philosophy of the Disney

management team in the 1970s, the park was designed as a close replica of the original Disneyland. A proven theme park prototype was, in effect, transplanted across the Pacific Ocean to a site where 30 million people lived within 30 miles of the new facility.

Disney’s management controlled most aspects of the design and operating characteristics of the park. The successful themes of Adventureland, Tomorrowland, Frontierland, etc. were faithfully reproduced. Even the famous Disney standards of no alcoholic beverages served within the park and no food from outside vendors allowed in, were translated to the new facility. Cleanliness, neatness, and precision operations were also incorporated into the workings of the new park. The Disney application of total quality management had to be upheld, regardless of the location of the facility.

In keeping with their conservative philosophy, the Disney management team, led by Ron Miller, wanted to reduce the financial risks inherent in international investments. Therefore, they gave up any ownership in the park and, for a mere $2.5 million procured a 45-year contract that gave the company the rights to collect 10 percent of admission revenues, 5 percent of food and merchandise sales, and 10 percent of corporate sponsored agreements. Disney retained responsibility for artistic design and development of the facility.

Tokyo Disneyland opened its doors to the public on April 13, 1983, and was instantly successful, from both a cultural and financial perspective. In its first full year of operations, it attracted approximately 9.9 million visitors, almost equal to attendance at Anaheim Disneyland, that same year. Over the next decade and a half, attendance grew steadily to more than 15 million by 1998, making this park the largest in the world.

Revenues from royalties and licensing fees were rapidly approaching an annual level of $100 million.

A number of factors contributed to the success of Tokyo Disneyland. The Japanese government was supportive of efforts to develop and promote the park. The Japanese people enthusiastically embraced the concepts, ideas, characters, and themes of the park. Tokyo Disneyland “appealed to the deep-seated Japanese passions of cleanliness, order, outstanding service, and technological wizardry.”[vii]

Other forces also supported the attractiveness of the park to the Japanese people. Its opening coincided with a strong economy in Japan. Personal incomes were expanding, discretionary spending was increasing, and there was a developing focus on relaxation and entertainment by a rapidly growing segment of the Japanese population.

All of these factors had contributed to the initial and continuing success of this park. By the mid-1990s both the owner of the facility, Oriental Land Company, Ltd. and the Disney organization had commenced plans for a second park at that site, Tokyo DisneySea. Once again, Oriental Land would make the initial investment, estimated in excess of $2.5 billion, while Disney would contribute creative content and management expertise, in return for an agreed-upon fee structure.

Euro Disney (now Disneyland Paris)

When Disney management evaluated their experience in Japan they vowed to learn from it and take maximum advantage of perceived opportunities in Europe. They desired a relatively large area of land, to facilitate future parks as well as hotel and real estate development. And, with high expectations for immediate success in attracting visitors, they would build a park of similar size and capacity to Tokyo Disneyland. Finally, they would take as large an equity ownership position as was permitted under European Union guidelines (49 percent).

In order to support their visitor level forecasts in a multicultural setting, they chose to localize some of the purely “American” aspects of their U.S. parks. They would incorporate the history and European roots of some of the most well-known Disney characters. Pinocchio was an Italian boy, Peter Pan and Wendy were of British origin, and Cinderella was a French girl. Disney re-emphasized these traditions in their marketing programs and theme park attractions.

The final location decision for a single European theme park complex was Marne-la-Vallee, a 4800 acre site 35 kilometers east of Paris. This region, including Paris and its suburbs, boasted three airports, six railway stations, a highly developed road network, and a link to Paris in the form of a high speed TGV train station to be constructed at the site. [viii]

The development of the site would be in stages, with Phase I including a Magic Kingdom theme park and 5,000 hotel rooms. Other retail and entertainment attractions (golf courses, convention center, water park, etc.) would be built over the next few years, to convince visitors to extend their time at the facilities. Approximately 5 years after opening, Phase II would commence with the construction of a Disney Studios theme park.

From a financial perspective, Disney management negotiated potentially lucrative contracts with the French government and Euro Disney, S.C.A. the owner and operator of the facilities. Disney invested approximately $450 million in the venture, primarily in the form of creative content, design expertise, and managerial talent. In return, they received a 49 percent ownership of the operating company, which became a public company through a highly successful IPO in November 1989. In addition, Disney received fees based on attendance and revenues from food and merchandise sales. They would also be entitled to a “base management fee” amounting to 3 percent of gross revenues for the first five years of operations, rising to 6 percent within five years. Further, they would receive an “incentive management fee” amounting to 30 percent of pre-tax cash flow in the first year of operations, rising to 50 percent of pre-tax cash flow from year five onward. If projected visitor attendance of 11 million were realized, with expenditures in the park at modest levels, the rates of return on Disney’s “investment” could have reached 70 percent or more in the first five years of operations.

In retrospect, the best forecasts were not achieved, even if given more time to reach expected goals. During the five-year construction program for Phase I, expenditures rose from $2.4 billion to $4.4 billion, due to a variety of factors, from unexpected quality enhancements to the inherent inefficiencies of having 38 general contracts working simultaneously.

The financial structure of the Euro Disney operating company was highly leveraged, with $4 of debt for every dollar of equity. With high fixed operating expenses, coupled with high fixed financial charges, the breakeven level for operating profitably was more than the firm could handle or achieve.

The gates swung open to the park in the Spring of 1992, to great fanfare and heavy promotion. However it was not long before management realized that major problems faced this operation. Attendance was approximately 2 million per year below the most probable projected levels. Recession in Western Europe and cultural clashes between the French people and the park’s managers contributed to these shortfalls. Expenditures for food and merchandise inside the park were also lower than expected, as were occupancy levels at the on-site hotels (within a year one of the hotels was actually closed).

The financial implications of these activities were unsettling for all stakeholders. The common stock price of Euro Disney shares plunged more than 70 percent in less than three years, management turnover at the operating company rose, a major financial restructuring of the company took place, and The Walt Disney Company agreed to give up its fee income for more than five years. Attendance levels did not reach year one expectations until year seven of actual operations. The harsh realities of the French theme park experience were vivid reminders of the risks inherent in a large, complicated, multiyear investment project. Expansion into Asia, again, would also bring with it global risks as well as uncertain opportunities.

RECENT DEVELOPMENTS

In the closing months of 1998, Mr. Eisner announced a restructuring of the theme park and resort operations. Consolidation of operating control was placed in the hands of a 20-year veteran manager of the division, Judson Green. For the first time all aspects of Disney’s recreation and travel business would be under one manager, reporting directly to Mr. Eisner.

The new division was renamed Walt Disney Attractions and would include existing theme parks and resorts, Walt Disney Imagineering (which designed the parks and rides), and Disney Regional Entertainment, a new unit that had been developing Disney Quest arcades and ESPN restaurants in various markets.

Mr. Green’s first major task was to plot the firm’s next phase of theme park expansion. Its focus was to enhance operations in foreign markets. “There are major parts of the world we are barely penetrating,” he noted.[ix]

Mr. Eisner instructed executives in all of Disney’s major business units to begin planning to boost their overseas operations. Not only would they expand outside the U.S. but plans were also being formulated to attract more foreign visitors to the domestic parks. For example, the current level of 20 percent foreign visitors to Walt Disney World was projected to grow to 50 percent in ten years. This restructuring laid the ground work for an aggressive attempt by Disney to expand its presence in foreign markets, especially China.

In order to formalize the analysis and evaluation of constructing and operating a theme park operation in China, Mr. Green assembled two teams, similar to the process utilized for the European location decision in the late 1980s. Although the Asian market could eventually support two or more theme park operations on a long-term basis, the decision to be made in 1999 was to identify and support only one new investment site. If both locations resulted in positive net present values, only one would be chosen now while the other could be built at a later date.

In recent years, operating results of the Disney Company had been less than stellar. Even with a strong economy in the U.S. and Europe, problems at the broadcasting unit and lackluster results from studio operations created challenges for Mr. Eisner. In addition, in 1998 and early 1999, there was the acceptance of two cruise ships for Caribbean operations that required outlays of approximately $350 million each.

In the theme park division, “California Disney” in Anaheim was scheduled to open early in 2001, at a cost in excess of $1 billion. In Orlando, the fourth theme park within the Walt Disney World complex, Animal Kingdom, was completed in 1998 at a cost of $800 million. These major projects had absorbed not only large amounts of capital, but also managerial time and creative capital at the Imagineering division.

At Tokyo Disneyland, a second theme park, “DisneySea” was also under construction. Although there was no financial investment by Disney, the firm was still heavily involved in creative content, design, development, and, ultimately, managerial

expertise. Even for a world-class leisure and entertainment business such as Disney, there was just so much that could be accomplished within a given period of time. Asia would now become the focus of this division, as the board carefully reviewed and evaluated the demands of each project with the resources available at the company.

Criteria for an Asian Site

In deciding on a site for a China theme park, a number of factors had to be identified, considered, and evaluated. Mr. Green, in consultation with Mr. Eisner and the Disney Board of Directors, was looking for an “international character” for this park. A diversified visitor base would reduce the risks of problems in one country having an adverse effect on international visitor flow.

Infrastructure in the area of the park and the region supporting it were also important. Visitors should be able to reach the park easily, by a variety of forms of transportation -- airports, railroads, roadways, tunnels, bridges, bus lines, etc. should be well established or enhanced while the park was being constructed. A prime area would be easily accessible and would also support a park most efficiently.

The park and the region should contribute to visitors extending their time spent at the Disney facility. Management knew that convincing visitors to stay at the site, in a Disney hotel, was likely to generate greater cash flows from the park and its ancillary facilities. A stock of hotel rooms to support park visitors was also important. Rooms at a variety of price points, from economy to luxury should be available when the park opened.

Successful theme parks in the area of the Disney facility may be viewed positively or negatively. They represent competition but, at the same time, may convince more people to visit the area to experience both facilities. This has occurred at the U.S. theme parks in Anaheim and Orlando, as well as the more recent experience in Paris.

Gross and disposable income levels of the area’s citizens as well as of foreign visitors would ill affect the success of the park. International visitors are more likely to be able to afford to travel and pay for attendance and in-park purchases. This is especially true of the U.S. parks. In contrast, in Tokyo, approximately 95 percent of visitors are Japanese, yet the park is tremendously successful.

Land area and its configuration contribute to the potential success of a theme park. Relatively flat areas are preferred, with extra land for expansion a definite asset. While land was plentiful in France, it did not contribute as much as originally anticipated

to the success of the park. In contrast, Tokyo transformed a block of barren coastal landfill into an important economic engine for the greater Tokyo area. Hong Kong officials hoped for the same results in their potential agreement with Disney.

In all Disney international operations, support from the local government is critical to the Disney Company. Making land available in a preferred location and investing in the park, in the form of equity and/or debt guarantees is very important. Mutual respect for what each side brings to the table will significantly impact the operation of a theme park facility for at least the next fifty years.

Once again Disney’s position is to make a minimal equity investment in any operating entity and generate most of its returns through royalty, licensing, and fee income streams. International risks would be reduced to fluctuations converting local currency cash flows into U.S. dollars.

Finally, while each city might try to convince Disney to sign an exclusivity contract with respect to future development in China, the company definitely will not sign such a document. They want the option to grow their theme park business in other cities in China and all over Asia, based on future economic and financial circumstances.

The Shanghai Plan

Shanghai, known in the past as the “Paris of the Orient,” had emerged in recent years as the largest and most affluent city in China. It was China’s most “Western” city and in the 1990s had emerged as a growing industrial and commercial metropolitan area.

Formal and informal discussions concerning a theme park facility in Shanghai had been taking place since the early 1990s. The mayor of Shanghai, Mr. Xu Kuangdi, had been pushing Disney to locate in this city and, if necessary, to build a smaller park in Hong Kong. Mayor Kuangdi also had powerful allies in Beijing, where the final decision would ultimately be made. From Disney’s perspective the focus would be on the right mix of financing, available land, and governmental approval. “There’s no question that if they build a theme park, people will come,” said Christopher Dixon, New York-based entertainment analyst for Paine Webber. “The trick is to make money, too.”[x]

Shanghai had already earmarked a site for a Disney theme park. The Pudong New Area, a 200-square-mile region across the Huangpu River from downtown Shanghai was being developed as part of a plan initiated in the early 1990s. Several zones had been established to support development of finance and trade, export processing, free trade, and high technology.

Infrastructure investments on a massive scale were also being made. New highways, railway facilities, and a second international airport were being built. A Disney theme park would “fit right in.”

The Disney site would be across the Huangpu River from the Bund, Shanghai’s world famous waterfront promenade. It is a mile long, with parks and some of the city’s major historic buildings.

The city was growing in population and financial stature, to serve an increasingly affluent mainland market. A number of other growing population centers (Changzhou, Suzhou, Wuxi, Wujiang, etc.) were within a few hours drive or train ride from the Disney site. Major rail lines served the city from the North, West, and South. The Shanghai metropolitan area, as well as the bordering provinces of Jiangsu, Zhejiang, and Auhui had a total population in excess of 130 million with average per capita income slightly exceeding $2100 per year.[xi]

The projected cost of the proposed facility in Shanghai was approximately $1 billion. Disney’s preferred course of action was to obtain a licensing deal, similar to that of Tokyo Disneyland. Technology, creative content, and managerial expertise would be exchanged for annual royalties and fees derived from admissions to the park, purchases of food and Disney products in the park, and revenues from new hotel facilities near the park.

This facility would be designed to operate profitably with a projected 9 million visitors in year one, rising at a rate of 3 percent per year for the next 10 years. A Magic Kingdom park would be constructed in Phase I, with the potential of an EPCOT type theme park added after at least five years of operations.

For the city of Shanghai, attracting a Disney theme park would be a vote of confidence from a high-profile foreign investor. It could serve as a signal that this city, the pride of the country’s Communist Party-led government, had attained international status.[xii]

From Disney’s perspective it was important to attain “first mover” advantage in exploiting the Chinese marketplace. Other global theme park operators were watching Disney’s international movements and following them around the world, and it would be important that they continue to ‘follow’ rather than to take the ‘lead.’ In particular, Disney recognized that they must keep abreast of the operations of Seagram’s Universal Studios theme park operations.

Universal had followed Disney to Orlando, they had followed them to Europe, and they where obviously evaluating Asian opportunities quite carefully. If Disney did not stake out a clear presence in Shanghai, it could result in their trailing Universal’s lead into China. Disney theme parks have never had to follow any firm into a potentially lucrative market. They have been number one from their genesis in Anaheim, Orlando,

Tokyo, and Paris. They felt that they must be number one in China. Hong Kong could wait!

The Hong Kong Plan

It had been less than two years since the Disney Company considered Hong Kong as a possible theme park location. Informal negotiations with government representatives commenced in October of 1998. Yet, the process of evaluating a site had progressed rapidly. A number of unique characteristics of the former British Crown Colony had contributed to Hong Kong now being considered as a prime target for Disney development and investment.

In the 1940s and 1950s, this area was primarily a trading port. Development continued, and by the 1980s, it was a low-cost manufacturing powerhouse. In the 1990s, as costs increased and manufacturing moved to lower cost Asian areas, Hong Kong became a regional financial center. As each of these periods developed and then declined, transformations took place to revitalize the area. The results were new, higher levels of growth and development for the region and its population.

In the late 1990s, some analysts were projecting another decline, due to the high costs of operating in the region. It was anticipated that cheaper destinations such as Shanghai and Singapore would attract business away from Hong Kong.

For a while these predictions seemed to be coming true, especially when Hong Kong stumbled into a deep recession in the aftermath of the Asian financial crisis of 1997-1998. Real estate and equity values declined sharply, firms went bankrupt and unemployment levels reached 20 year highs.

Yet, Hong Kong seemed destined to transform itself once again. Government officials and private business owners and managers staked out yet another new role for the region: an information technology center serving greater China. The Special Administrative Region (SAR), established when control of Hong Kong had reverted to China rule from Great Britain in July 1997, had been quite successful in attracting a growing number of new investments in software, e-commerce, and dot com companies.

Known as the “City of Life,” Hong Kong had always had an international character, with a high percentage of tourists and visitors in relation to its indigenous population. The infrastructure needed to support a Disney theme park was already in place, with a new world-class airport, as well as commitments for enhanced railroad and ferry service between Lantau Island and the mainland. The availability of hotel rooms and restaurants could easily support the expected international visitors. While relatively expensive, they had a strong Chinese flavor and would complement the All-American theme of a Magic Kingdom where Mickey reigned supreme.

A Disney theme park in Hong Kong would be expected to draw visitors from China and South East Asia. The area had had some experience with theme and amusement parks. In Hong Kong, Ocean Park had become a popular amusement park, while in Shenzhen, across the border in China; there were several attractions for children. The most well known and successful facility was Splendid China, which featured replicas of the Great Wall, the Forbidden City, and other famous country-wide tourist sites. A more recent park, Window of the World, featured miniaturized tourist sites like Moscow’s St. Basil’s Cathedral.

Hong Kong is located at the mouth of the Pearl River Delta of south-eastern China’s Guangdong Province. This region had, over the last two decades, achieved the fastest economic growth of any in China. Seventy million people now lived in the province, with an average per capita income approaching $2000 per year. The capital, Guangzhou (formally Canton), with almost 7 million people, was 60 miles up river. In contrast, the annual per capita income levels in Hong Kong were approximately $22,000.

Hong Kong had always been a center for business travelers and “we’ve always had lots of exciting things to do for adult visitors,” said Mike Rowse, Commissioner for Tourism. “Our shopping, dining, and hotel facilities are world renowned. But one thing missing has been an attraction that would make families sitting down together to plan their holidays think of Hong Kong as a good destination. A Disney theme park would fill that gap in our tourist product.” [xiii]

After analyzing the experiences of Disney’s other international theme park performances, the following plan had been established for a Hong Kong theme park. A world class facility would be constructed on Lantau Island, at Penny’s Bay, a location between the new international airport and downtown, a distance of only six miles. The facility would be designed to accommodate approximately 5 million visitors per year. More than 3 million of them would be expected to come from the mainland as well as Taiwan, Southeast Asia, and Australia.

Growth would be expected as the park matured and positive leisure time experiences were shared by visitors. Between 17 and 20 major attractions, all proven at other Disney theme parks, would be developed, with additions as visitor levels increased. Within 5-10 years an estimated 10 million visitors per year would be coming to the park, and a second park would then be built on adjacent land.

The site also had room for Disney-theme hotels. They envisioned two or three hotels with 1400 rooms, adding another 700 rooms over the next 5 to 10 years. As part of this resort complex, retail, dining, and entertainment facilities would also be built.

This approach to development would reduce the risks to The Walt Disney Company, yet allow for a large and growing return on their investment. Incremental enhancements to facilities would be added as the visitor market developed, resulting in a balanced approach between investment and visitor demands.

DECISION TIME

Mr. Eisner and his management team were well prepared for the evaluation of the two sites in China. Experienced financial executives at The Walt Disney Company were quite comfortable working with cost of capital estimation, forecasting of entertainment expenditure demand, and various methods of project evaluation.

Within the Disney corporate organization, division hurdle rates were used regularly to evaluate investment projects within each of the firm’s operating units. Each of the teams representing the alternative sites, Shanghai and Hong Kong, were instructed to incorporate country and/or political risk factors and adjustments, either to their revenue streams or cost of capital estimates. The Disney Board of Directors would decide on the location of the new theme park site after evaluating each team’s proposal. Mr. Eisner would then pronounce it to the world. Let the presentations begin!

EXHIBITS

Exhibit 1

History of the Walt Disney Company

|1923 |The Disney Brothers Studio is founded as a partnership by Walter E. Disney and Roy O. Disney on October 16 when Walt |

| |signs a contract with M.J. Winkler to produce a series of animated short subjects entitled the Alice Comedies |

|1926 |The Disney Brothers Studio moves from its office on Kingswell Avenue to a new studio complex located at 2719 Hyperion |

| |Avenue, at the corner of Hyperion Avenue and Griffith Park Boulevard, on February 8 |

|1928 |Steamboat Willy, Disney’s first animated film with sound effects and dialogue, starring Mickey and Minnie Mouse in their|

| |first public appearance, is released November 18 |

|1929 |Four companies are formed December 16 to replace the Disney Brothers partnership: Walt Disney Productions, Ltd. to carry|

| |on the production of films; Walt Disney Enterprises to oversee licensing of cartoon characters; Liled Reality and |

| |Investment Company to manage the Disneys’ real estate; and the Disney Film Recording Company |

|1930 |Pluto first appears in The Chain Gang, delivered on August 18, although he did not receive the name Pluto until The |

| |Moose Hunt, delivered on April 30, 1931 |

|1932 |At the 1932 Academy Awards, Flowers and Trees, the first full-color animated film, released on July 30, earns Walt |

| |Disney his first Academy Award for Best Cartoon Short Subject. At the same ceremony, Walt Disney receives an honorary |

| |Academy Award for the creation of Mickey Mouse |

| | |

| |Goofy first appears in Mickey’s Revue |

|1933 |The first Mickey Mouse watch is sold by Ingersoll in June |

|1934 |Donald Duck first appears in The Wise Little Hen, released June 9 |

|1937 |On December 21, Walt Disney Productions, Ltd. premiers Snow White and the Seven Dwarfs, the first feature-length |

| |animated film |

|1938 |Walt Disney Productions reorganizes on September 29 under the name of Walt Disney Enterprises to absorb three of the |

| |companies created in late 1929: Liled Realty and Investment Company, Walt Disney Enterprises, and Walt Disney |

| |Productions, Ltd. On December 27, Walt Disney Enterprises changes it name to Walt Disney Productions |

|1940 |On April 2, Walt Disney Productions becomes a public company on the over-the-counter market by issuing 155,000 shares of|

| |6% cumulative convertible preferred stock. |

| | |

| |Walt Disney Productions completes its move to its new studios in Burbank, located at the corner of Alameda Avenue and |

| |Buena Vista Street, on May 6th. |

| | |

| |Fantasia is released on November 13th. |

|1949 |The Walt Disney Music Company is formed |

|1952 |WED Enterprises is founded as a private company owned solely by Walt Disney to design and create the Disneyland theme |

| |park |

|1953 |Walt Disney Productions forms its Buena Vista Distribution subsidiary to distribute motion pictures |

|1954 |Disneyland, a one-hour weekly television program produced by Walt Disney Productions for ABC, first airs on October 27 |

|1955 |The Disney theme park opens, July 17. With an investment of $500,000, Walt Disney Production owns 34.5% of Disneyland, |

| |Inc., the company that owns Disneyland. On October 3, The Mickey Mouse Club, a daily one-hour program, first airs on |

| |ABC. |

|1957 |Walt Disney Productions exercises options to purchase an additional 31.0% stake in Disneyland, Inc. from Walt Disney, |

| |WED Enterprises, and Western Publishing, and Litho Co. for a total cost of $528,810. |

|1958 |The Disneyland television show changes its name to Walt Disney Presents on September 12 |

|1960 |Walt Disney Productions purchases the remaining 34.5% stock interest in Disneyland, Inc. from American |

| |Broadcasting-Paramount Theaters, Inc. for $7.5 million |

|1961 |Walt Disney Productions’ first color television show, Walt Disney’s Wonderful World of Color (formerly Walt Disney |

| |Presents), begins airing nationally on September 24 on NBC |

|1964 |Four Disney attractions, “It’s a Small World,” “Great Moments with Mr. Lincoln,” the “Magic Skyway,” and General |

| |Electric’s “Carousel of Progress,” debut at the New York World’s Fair on April 22 |

|1965 |Walt Disney Productions acquires WED Enterprises from Walt Disney for approximately $4 million on February 3. |

| | |

| |Walt Disney Productions purchases 27,443 acres of land for approximately $5 million in Orange and Osceola counties, 15 |

| |miles southwest of Orlando, Florida |

|1966 |Walt Disney dies on December 15 |

|1967 |The Florida State Legislature passes a bill that provides for the Reedy Creek Improvement District, with |

| |responsibilities that include building codes, zoning regulations, water control programs, utilities, and other necessary|

| |services for Walt Disney World properties. |

|1971 |Walt Disney Productions issues to the public 500,000 shares of common stock in January to raise $74 million to finance |

| |the Walt Disney World project. |

| | |

| |The 100 millionth guest is welcomed at Disneyland on June 17. |

| | |

| |The Magic Kingdom at Walt Disney World opens on October 1. |

| | |

| |Roy Disney dies on December 20. |

|1972 |The Walt Disney Company forms the Walt Disney Travel Company to market tour packages to Walt Disney World, Disneyland, |

| |and other vacation destinations. |

|1976 |River Country, a water recreation park, opens at Walt Disney World in June. |

|1979 |Walt Disney Productions finalizes an agreement with the Oriental Land Company to construct Tokyo Disneyland, specifying |

| |that the Oriental Land Company will finance, own, and operate the park. In return for design and master planning, Walt |

| |Disney Productions receives a royalty percentage of all admissions, merchandise, and food revenue. |

|1982 |EPCOT Center opens on October 1. |

| | |

| |Walt Disney Productions acquires the rights to the name, likeness, and portrait of Walt Disney and the steam train and |

| |monorail system at Disneyland from Retlaw Enterprises for 888,461 shares of Walt Disney Productions’ common stock valued|

| |at $46.2 million. |

|1983 |On April 1, Walt Disney Pictures is incorporated as a separate company responsible for the development, production, and |

| |marketing of all live action films and commercial television programming. |

| | |

| |Tokyo Disneyland opens on April 15. |

| | |

| |The Disney Channel first broadcasts cable TV programming on April 18. |

|1984 |Saul Steinberg affiliates acquire 4.2 million shares of Walt Disney Productions’ common stock between January and June |

| |at an average cost of approximately $70 per share. |

| | |

| |Touchstone Pictures, a new label of Walt Disney Pictures, releases its first film, Splash on March 9. |

| | |

| |On May 17, Walt Disney Productions’ Board of Directors approves the purchase of Arvida Corporation, a Florida-based |

| |community planning and development firm. |

| | |

| |On May 25, in a filing with the SEC, Steinberg formally announces that he might acquire as much as 49.9% of Disney’s |

| |stock, declaring that the proposed acquisition of Arvida, which “was not in the best interests of shareholders,” made it|

| |impossible for him to remain “merely a passive investor.” |

| | |

| |Walt Disney Productions acquires Arvida corporation on June 6 from Bass family interests and Arvida’s management for |

| |$200 million payable in 3.3 million shares of Walt Disney Productions’ common stock. |

| | |

| |On June 8, MM Acquisition Corporation, formed by Saul Steinberg announces its interest to take over and dismantle Walt |

| |Disney Productions by offering $67.60 a share for Disney stock effective June 11. |

| | |

| |On June 11, Walt Disney Productions repurchases 4.2 million shares (approximately 11.1%) of Disney common stock from |

| |Reliance for $328 million ($77.50 per share). |

| | |

| |Walt Disney Productions welcomes new Chairman/Chief Executive Officer Michael D. Eisner and new President/Chief |

| |Operating Officer Frank G. Wells on September 23. |

|1985 |Walt Disney Productions announces plans for the Disney-MGM Studios Theme Park at the Walt Disney World Resort in |

| |Florida. |

| | |

| |Silver Screen Partners II formed to raise funds for film production. The venture raises over $193 million and finances |

| |such films as Down and Out in Beverly Hills, Ruthless People, and the Color of Money. |

| | |

| |The Golden Girls first airs on NBC-TV on September 14. |

|1986 |Walt Disney Productions changes its name to The Walt Disney Company on February 6. |

| | |

| |On March 1, WED Enterprises’ name changes to Walt Disney Imagineering. |

| | |

| |The 500 millionth Disney theme park guest is welcomed on March 25. |

| | |

| |Silver Partners III is formed on September 25 to raise funds for film production. The venture raises over $300 million |

| |and finances such films as Three Men and a Baby, Good Morning Vietnam, Who Framed Roger Rabbit, and Honey, I Shrunk the |

| |Kids. |

|1987 |On January 29, The Walt Disney Company sells Arvida Corporation to a JMB Realty affiliate for approximately $400 million|

| |in cash, notes, and other receivables. |

| | |

| |The Walt Disney Company re-incorporates in Delaware on February 11. |

| | |

| |The Walt Disney Company signs an agreement with the French government to proceed with the development of the Euro Disney|

| |Resort on March 24. |

| | |

| |The first Disney Store opens at the Glendale Galleria in Glendale, California. |

|1988 |The Walt Disney Company acquires the Wrather Corporation, whose assets include The Disneyland Hotel, for approximately |

| |$161 million in cash and $89 million in debt. |

| | |

| |The opening of Disney’s Grand Floridian Beach Resort ushers in a new era of accelerated hotel buildout at Walt Disney |

| |World during which 12 new hotels have been added to date. |

|1989 |The Disney-MGM Studios Theme Park and Pleasure Island entertainment complex open at Walt Disney World. |

| | |

| |51% of Euro Disney’s S.C.A.’s 170 million shares are offered to European investors at ₣72 per share. A subsidiary of |

| |The Walt Disney Company owns the remaining 49%. |

|1990 |The first international Disney Store opens on London’s Regent Street. |

|1991 |The Walt Disney Company replaces USX Corporation in the Dow Jones 30 Industrials. |

|1992 |On April 12th, Euro Disney (later renamed Disneyland Paris) opens 20 miles east of Paris, France. |

| | |

| |The National Hockey League awards Disney a franchise that would later become The Mighty Ducks of Anaheim. |

|1993 |Buena Vista Pictures Distribution acquires Miramax Film Corporation. |

|1994 |Disney commits $500,000 to create Disney GOALS, a program designed to offer organized athletics, supplementary |

| |education, and community service to local underprivileged youths. |

| | |

| |President and Chief Operating Officer Frank G. Wells dies. |

| | |

| |Disney’s first Broadway stage show, Beauty and the Beast: A New Musical, officially opens, breaking attendance and box |

| |office records. |

| | |

| |Walt Disney Pictures releases The Lion King domestically, which becomes Disney’s most profitable film ever. |

| | |

| |The Lion King soundtrack hits Number 1 on the Billboard chart, where it stays for nine consecutive weeks. |

| | |

| |On September 6th, Disney theme parks welcome their one billionth guest. |

| | |

| |The Walt Disney Company sells a portion of it shares in Euro Disney S.C.A., operator of Disneyland Paris, to a Saudi |

| |Arabian investor, reducing it ownership interest to 39%. |

|1995 |The Lion King becomes the top-selling video of all time, selling over 30 million units domestically and surpassing the |

| |record set in 1994 by Snow White and the Seven Dwarfs. |

| | |

| |The Walt Disney Company announces it intention to acquire Capital Cities/ABC for approximately $19 billion. |

|1996 |Stockholders of Disney and Capital Cities/ABC approve the merger in their respective special meetings of shareholders |

| |held in New York City. |

| | |

| |On February 9th, the acquisition of Capital Cities/ABC becomes effective and CCB stock trades for the last time. |

| | |

| |Disney Online launches , a Website designed to promote a vast range of Disney products on the Internet. |

| | |

| |Disney forms a partnership with the California Angels baseball team, in which Disney has a 25% interest. |

| | |

| |The world’s largest Disney Store to date, at 40,000 square feet, opens on New York’s Fifth Avenue and sets the all-time |

| |record for single-day volume in a Disney Store. |

| | |

| |Disney joins McDonalds’ in a 10-year multinational marketing alliance linking McDonalds’ 18,700 restaurants to Disney’s |

| |theme parks, films, and home video releases. |

| | |

| |The Walt Disney Company announces plans to open Disney’s California Adventure Theme Park in 2001, as part of the |

| |expanded Disneyland Resort in Anaheim. |

| | |

| |ESPN Inc. launches ESPNEWS, a 24 hour a day sports news network. |

| | |

| |Radio Disney, a live music-intensive radio network for children, debuts offering fun, high-energy entertainment and |

| |family-oriented programming for kids under the age of 12. |

| | |

| |Disney sells Los Angeles Television Channel 9, KCAL, as a condition of the ABC acquisition, to Young Broadcasting, Inc.,|

| |New York, for $387 million. |

|1997 |Comcast Corporation and ABC Cable Networks agree to form a new organization to acquire a majority interest in E! |

| |Entertainment Television. |

| | |

| |Club Disney, an interactive children’s development play center, and Disney’s first regional entertainment concept, opens|

| |its first unit in Thousand Oaks, California. |

| | |

| |Disney announces a joint venture with Pixar to create five animated films over the next 10 years. |

| | |

| |Disney announces that its employees will commit one million hours of volunteer service through the year 2000 in response|

| |to the President’s Summit on America’s Future. |

| | |

| |Disney purchases a significant equity stake in Starwave Corporation, a leading producer of Internet media, and assumes |

| |operational control of the company. |

| | |

| |Knight-Ridder, Inc. announces an agreement with Disney to purchase four newspapers owned by ABC, Inc. for $1.65 billion.|

| | |

| |Disney agrees to purchase Mammoth Records, one of the top independent labels in the music industry. |

| | |

| |ESPN reaches an agreement to acquire Classic Sports Network, which features the greatest games, heroes, and stories in |

| |the history of sports. |

|1998 |Disney’s Animal Kingdom opens as the fourth gate at Walt Disney World. |

| | |

| |Disney records a three-for-one stock split. |

| | |

| |Disney Magic, the company’s first cruise ship, departs on its maiden voyage. Disney’s second cruise ship, Disney Wonder|

| |is scheduled to launch the following summer. |

| | |

| |Disney completes its acquisition of a 43% equity interest in Infoseek, a leading Internet navigation company. |

|1999 |Disney and Infoseek launch the Internet portal . |

| | |

| |Disney agrees to sell Fairchild Publications, Inc., a subsidiary of ABC, Inc. and publisher of W, Jane, and Women’s Wear|

| |Daily, to Advance Publications, Inc. |

| | |

| |Euro Disney S.C.A. announces the launch of its second theme park, Disney Studios, scheduled to open in the spring of |

| |2002 at the Disneyland Paris site. |

Source: Fact Book, The Walt Disney Company, 1992 and 1998

Exhibit 2

The Walt Disney Company Consolidated Balance Sheet

(in millions)

Year Ended September 30

| | |1998 |1997 |1996 |

|Assets | | | | |

| |Current Assets | | | |

| |Cash and Cash Equivalents |$127 |$317 |$278 |

| |Receivables |3,999 |3,329 |3,012 |

| |Inventories |899 |853 |876 |

| |Film and Television Costs |3,223 |2,186 |1,539 |

| |Deferred Income Taxes |463 |482 |526 |

| |Other Assets |664 |486 |1,273 |

| |Total Current Assets |$9,375 |$7,653 |$7,504 |

| | | | | |

| |Film and Television Costs |2,506 |2,215 |1,720 |

| |Investments |1,814 |1,914 |1,022 |

| |Theme Parks, Resorts, and Other Property, at cost Attractions, Buildings, and |14,037 |11,787 |11,019 |

| |Equipment | | | |

| |Accumulated Depreciation |(5,382) |(4,857) |(4,448) |

| | |8,655 |6,930 |6,571 |

| |Projects in Progress |1,280 |1,928 |1,342 |

| |Land |411 |93 |118 |

| | |10,346 |8,951 |8,031 |

| |Intangible Assets, Net |15,769 |16,011 |18,045 |

| |Other Assets |1,568 |1,753 |1,019 |

| |Total Assets |$41,378 |$38,497 |$37,341 |

| | | | | |

|Liabilities and |Current Liabilities | | | |

|Stockholders’ Equity | | | | |

| |Accounts and Taxes payable and Other Accrued Liabilities |$4,767 |$4,748 |$5,055 |

| |Current Portion of Borrowings |2,123 |897 |183 |

| |Unearned Royalty and Other Advances |635 |631 |531 |

| |Total Current Liabilities |7,525 |6,276 |5,769 |

| | | | | |

| |Borrowings |9,562 |10,171 |12,159 |

| |Deferred Income Taxes |2,488 |2,161 |1,269 |

| |Other Long Term Liabilities, Royalties, and Other Advances |2,415 |2,604 |2,058 |

| | | | | |

| |Stockholders’ Equity | | | |

| |Common Stock |8,995 |8,548 |8,590 |

| |Retained Earnings |10,981 |9,543 |7,919 |

| |Cumulative Translation and Other |13 |(12) |39 |

| | |19,989 |18,079 |16,548 |

| |Treasury Stock |(593) |(462) |(462) |

| |Shares Held by TWDC Stock Compensation Fund |(8) |(332) |0 |

| | |19,388 |17,285 |16,086 |

| |Total Liabilities and Stockholders’ Equity |$41,378 |$38,497 |$37,341 |

| | | | | |

Source: Annual Report, The Walt Disney Company, 1998

Exhibit 3

The Walt Disney Company Statement of Income

(in millions, except per share data)

Year Ended September 30

| | |1998 |1997 |1996 |

| | | | Pro Forma[3] |

|Revenues |Creative Content |$10,302 |$10,098 |$9,564 |

| |Broadcasting |7,142 |6,501 |6,009 |

| |Theme Parks & Resorts |5,532 |5,014 |4,502 |

| | |22,976 |21,613 |20,075 |

| | | | | |

|Costs and Expenses |Creative Content |8,899 |8,405 |8,129 |

| |Broadcasting |5,817 |5,216 |4,925 |

| |Theme Parks & Resorts |4,245 |3,878 |3,512 |

| | |18,961 |17,499 |16,566 |

| | | | | |

|Operating Income |Creative Content |1,403 |1,693 |1,435 |

| |Broadcasting |1,325 |1,285 |1,084 |

| |Theme Parks & Resorts |1,287 |1,136 |990 |

| | |4,015 |4,114 |3,509 |

| | | | | |

| |Gain on Sale of KCAL |0 |0 |0 |

| |Accounting Change for SFAS 121 |0 |0 |(300) |

| |Total Operating Income |4,015 |4,114 |3,209 |

| | | | | |

|Corporate Activities and Other |(236) |(367) |(249) |

|Net Interest Expense |(622) |(693) |(698) |

|Acquisition-related Costs |0 |0 |0 |

|Income Before Income Taxes |3,157 |3,054 |2,262 |

|Income Taxes |(1,307) |(1,282) |(988) |

|Net Income |$1,850 |$1,772 |$1,274 |

| | | | |

|Net Income Excluding Non-recurring Items[1] |$1,850 |$1,772 |$1,457 |

| | | | |

|Earnings Per Share-Diluted |$0.89 |$0.86 |$0.62 |

|Earnings Per Share-Basic |$0.91 |$0.88 |$0.63 |

| | | | |

|Earnings Per Share-Diluted Excluding Non-recurring Items[1] |$0.89 |$0.86 |$0.62 |

|Earnings Per Share-Basic Excluding Non-recurring Items[1] |$0.91 |$0.88 |$0.72 |

| | | | |

|Average Common Shares Outstanding-Diluted[2] |2,079 |2,060 |2,067 |

|Average Common Shares Outstanding-Basic[2] |2,037 |2,021 |2,037 |

| | | | |

[1] Non-recurring items refer to the gain on the sale of KCAL in fiscal 1997 and accounting change for SFAS 121 and acquisition-related costs in fiscal 1996.

[2] The difference between basic shares outstanding and diluted shares outstanding is attributable to stock options.

[3] Pro forma adjustments reflect the acquisition of ABC, sale of KCAL, and the disposal of certain publishing operations acquired in the ABC acquisition as if those events occurred at the beginning of the years presented.

Source: Annual Report, The Walt Disney Company, 1998

Exhibit 4

The Walt Disney Company

Consolidated Statement of Cash Flows

(in millions)

Year Ended September 30

| | |1998 |1997 |1996 |

| |Net Income |$1,850 |$1,966 |$1,214 |

| | | | | |

|Items Not Requiring |Amortization of Film and Television Costs |2,514 |1,995 |1,786 |

|Cash Outlays | | | | |

| |Depreciation |809 |738 |672 |

| |Amortization of Intangible Assets |431 |749 |301 |

| |Gain on Sale of KCAL |0 |(135) |0 |

| |Accounting Change |0 |0 |300 |

| |Other |(75) |(15) |22 |

| | | | | |

|Changes In |Receivables |(664) |(177) |(297) |

| |Inventories |(46) |8 |(13) |

| |Other Assets |179 |(441) |(399) |

| |Accounts and Taxes Payable and Accrued Liabilities |218 |608 |56 |

| |Film and Television Costs – Television Broadcast Rights |(447) |(179) |58 |

| |Deferred Income Taxes |346 |292 |(78) |

| |Investments in Trading Securities |0 |0 |85 |

| | |3,265 |3,133 |2,493 |

| |Cash Provided by Operations |5,115 |5,099 |3,707 |

| | | | | |

|Investing Activities |Film and Television Costs |(3,335) |(3,089) |(2,760) |

| |Investments in Theme Parks, Resorts, and Other Property |(2,314) |(1,922) |(1,745) |

| |Acquisitions |(213) |(180) |0 |

| |Proceeds from Sales of Marketable Securities and Other Investments |238 |31 |409 |

| |Purchases of Marketable Securities |(13) |(56) |(18) |

| |Investments in and Loan to E! Entertainment |(28) |(321) |0 |

| |Proceeds from Disposal of Publishing Operations |0 |1,214 |0 |

| |Proceeds from Disposal of KCAL |0 |387 |0 |

| |Acquisition of ABC, Net of Cash Acquired |0 |0 |(8,432) |

| | |(5,665) |(3,936) |(12,546) |

| | | | | |

|Financing Activities |Borrowings |1,830 |2,437 |13,560 |

| |Reduction of Borrowings |(1,212) |(4,078) |(4,872) |

| |Repurchases of Common Stock |(30) |(633) |(462) |

| |Dividends |(412) |(342) |(271) |

| |Exercise of Stock Options and Other |184 |180 |85 |

| |Proceeds from Formation of REITs |0 |1,312 |0 |

| | |360 |(1,124) |8,040 |

| | | | | |

| |(Decrease)/Increase in Cash and Cash Equivalents |(190) |39 |(799) |

| |Cash and Cash Equivalents, Beginning of Year |317 |278 |1,077 |

| | | | | |

| |Cash and Cash Equivalents, End of Year |$127 |$317 |$278 |

Source: Annual Report, The Walt Disney Company, 1998

Exhibit 5

The Walt Disney Company

Key Financial Ratios

Year Ended September 30

| | |1998 |1997 |1996 |

| | | | |

| | | |Pro Forma[1] |

|Operating Performance |Operating Income/Total Revenues |17.5% |19.0% |17.5% |

| |Income Before Income Taxes/Total Revenues |13.7% |14.1% |12.8% |

| |Net Income/Total Revenues |8.1% |8.2% |7.3% |

| | | | | |

|Return On Investment |Net Income/Average Stockholder’s Equity |10.1% |10.6% |9.2% |

| |Net Income/Average Total Assets |4.6% |4.7% |4.0% |

| | | | | |

|Capital Structure |Borrowings/Average Stockholders’ Equity |63.7% |66.3% |78.2% |

| |Borrowings/Average Total Book Capitalization |29.3% |29.2% |33.5% |

| |Borrowings/Total Market Capitalization |22.5% |20.5% |29.0 |

| | | | | |

|Debt Service Coverage |Income Before Net Interest and Taxes/Total Interest Cost |6.1x |5.4x |4.7x |

| |Income Before Net Interest, Depreciation, and Amortization/Total Interest Cost |8.1x |7.1x |6.1x |

| | | | | |

|Cash Flows |Cash Provided by Operations Per Share |$2.46 |$2.48 |$1.79 |

| |Cash Provided by Operations Per Share/Total Revenue |22.3% |23.6% |18.5% |

| |Cash Provided by Operations Per Share/Average Total Assets |12.8% |13.4% |14.2% |

| | | | | |

[1] Pro Forma adjustments reflect the acquisition of ABC, sale of KCAL, and the disposal of certain publishing operations acquired in the ABC acquisition as if those events occurred at the beginning of the years presented.

Source: Annual Report, The Walt Disney Company, 1998

Exhibit 6

The Walt Disney Company

Business Segments

|Business Segments |1998 |1997 |1996 |

|Revenues | | | |

|Creative Content |$10,302 |$10,937 |$10,159 |

|Broadcasting |7,142 |6,522 |4,078 |

|Theme Parks and Resorts |5,532 |5,014 |4,502 |

| |$22,976 |$22,473 |$18,739 |

|Operating Income | | | |

|Creative Content |$1,403 |$1,882 |$1,561 |

|Broadcasting |1,325 |1,294 |782 |

|Theme Parks and Resorts |1,287 |1,136 |990 |

|KCAL Gain |-- |135 |-- |

|Accounting Change |-- |-- |(300) |

| |$4,015 |$4,447 |$3,033 |

|Capital Expenditures | | | |

|Creative Content |$221 |$301 |$359 |

|Broadcasting |245 |152 |113 |

|Theme Parks and Resorts |1,693 |1,266 |1,196 |

|Corporate |155 |203 |77 |

| |$2,314 |$1,922 |$1,745 |

|Depreciation Expense | | | |

|Creative Content |$209 |$187 |$163 |

|Broadcasting |122 |104 |104 |

|Theme Parks and Resorts |444 |408 |358 |

|Corporate |34 |39 |47 |

| |$809 |$738 |$672 |

|Identifiable Assets | | | |

|Creative Content |$9,509 |$8,832 |$8,837 |

|Broadcasting |20,099 |19,036 |19,576 |

|Theme Parks and Resorts |9,214 |8,051 |7,066 |

|Corporate |2,556 |2,578 |1,862 |

| |$41,378 |$38,497 |$37,341 |

|Supplemental Revenue Data | | | |

|Creative Content | | | |

| Theatrical Product |$5,085 |$5,595 |$5,472 |

| Consumer Product |3,452 |3,076 |2,518 |

|Broadcasting | | | |

| Advertising |5,287 |4,937 |3,092 |

|Theme Parks and Resorts | | | |

| Merchandise, Food, and Beverage |1,780 |1,754 |1,555 |

| Admissions |1,739 |1,603 |1,493 |

| | | | |

Source: Annual Report, The Walt Disney Company, 1998

Exhibit 7

Background Report – Shanghai

Shanghai is the largest city in the world. It covers an area of approximately 2500 square miles and has a population of over 16 million. About 14 miles north of the city the Whangpoor and Yangtze rivers meet and empty into the East China Sea. Hangzhau Bay is south of the city. Shanghai’s location near these important waterways has contributed significantly to its position as the leading Chinese port and industrial city. It occupies a central location along China’s coastline. Except for a few hills lying to the southwest, most parts of the Shanghai region are flat and belong to the alluvial plain of the Yangtze River Delta. Average sea level elevation is about 13 feet.

With a northern subtropical maritime monsoon climate, Shanghai enjoys four distinct seasons, generous sunshine, and abundant rainfall. Its spring and autumn are relatively short compared with summer and winter. The average rainfall is 1200 millimeters, with nearly 60 percent of the precipitation coming during the May through September rainy season.

Shanghai has the most developed transportation system in China. Three railway lines come into the area from the South, West, and North. The longest high-speed railroad in Asia, which will connect the city with Beijing, is under construction and scheduled to be operational in 2008.

Shanghai is the largest and busiest seaport on the West Coast of the Pacific Ocean. In 2000, it’s second international airport will be opened, located in the Pudong New Area. With modernization of the old airport, Shanghai can now handle 25 million air travelers per year. In addition to the rail lines, a large number of highways lead from Shanghai to other cities in the Yangtze Delta area. Within 200 miles of the city live 250 million people, the most populous region in China.

Shanghai is also the focal point of China’s national development policies and is designated as the engine to drive economic development in the Yangtze River region. It has a well established, diversified manufacturing base of heavy and light industries. In the last decade, the economy has shifted towards service-oriented industries. The Shanghai region, with 1 percent of China’s population, is responsible for producing 10 percent of the country’s Gross Domestic Product! It is projected that Shanghai will be a Far Eastern international financial, business, and trading center within the next 10 years.

Exhibit 8

Background Report – Hong Kong

Hong Kong is a bustling center of economic activity, with one of the world’s highest population densities. It is located near the mouth of the Pearl River, about 90 miles southeast of Canton, China. It ranks among the major ports in Asia, and as a center of trade, commerce, manufacturing, and tourism. Hong Kong covers a total area of 1,126 square miles, but only 404 square miles of the total is land. It had a population of almost 7 million inhabitants in late 1998.

Hong Kong consists of a peninsula attached to the mainland of China and more than 235 islands. The main land area is divided into two sections – the New Territories in the north and the Kowloon Peninsula in the south. The main island, Hong Kong Island, lies just south of the Kowloon Peninsula.

Most of Hong Kong’s economic activity takes place in the urban areas of Victoria and Kowloon, where a majority of the people live. Victoria is the capital of Hong Kong, and Kowloon is the largest urban settlement. Victoria is the seat of government and the financial center of Hong Kong. It is located on the north shore of Hong Kong Island, opposite Kowloon on the Kowloon Peninsula. Victoria Harbor separates these two communities.

Hong Kong has a semi-tropical climate, tending towards the temperate, for nearly one-half the year. The summer months of May to August are hot and humid with temperatures reaching 90ºF. Occasional showers and thunderstorms may be expected, particularly during morning hours. September and October are likely to experience tropical cyclones of varying strengths. During November and December, there are pleasant breezes, plenty of sunshine, and comfortable temperatures. January and February are cloudier, with occasional cold fronts bringing in cold, northerly winds with temperatures dropping below 50ºF. March and April are generally milder and pleasant, with occasional spells of high humidity. Rainfall averages 88 inches per year, with more than 75 percent of that rain falling in the summer months.

Hong Kong’s transportation system revolves around the airplane. A new, world class, international airport, recently completed on landfill from Lantau Island, can handle in excess of 30 million passengers per year and connects Hong Kong to every major city and population center in the world. Although the area is relatively small it boasts one of the world’s most efficient, safe, affordable, and frequent public transportation systems. The Mass Transit Railway (MTR) is an underground network with five lines and 44 stations. On Hong Kong Island several franchised bus companies operate approximately 300 bus routes. The Kowloon-Canton Railway connects Hong Kong Island to the mainland, while the Kowloon-Shenzheng Highway, connecting Hong Kong to Canton providence, is one of the busiest highways in Asia.

Exhibit 9

Comparative Data

Shanghai and Hong Kong

|Characteristics |Shanghai |Hong Kong |

|Weather |Seasonal |Warm |

|Land Area for Proposed Theme Park |1,000 acres |430 acres |

|Indigenous Population (Metropolitan Area) |16 million |7 million |

|Regional Population |105 million |45 million |

|Tourist Population (Area) |40 million |10.4 million |

|Hotel Rooms Within Two Hours of the Park |25,000 |35,000 |

| | | |

Exhibit 10

Climate Conditions –

International Comparisons

| |Mean Temperature (Fahrenheit) |Days of Rain or Snow |

|Month |Tokyo |Paris |Shanghai |Hong Kong |Tokyo |Paris |Shanghai |Hong Kong |

|January |38 |37 |41 |62 |8 |15 |12 |4 |

|February |39 |39 |46 |63 |8 |13 |8 |8 |

|March |45 |44 |50 |66 |13 |15 |14 |6 |

|April |55 |51 |64 |77 |14 |14 |10 |10 |

|May |62 |57 |72 |80 |14 |13 |11 |10 |

|June |69 |63 |77 |83 |16 |11 |19 |16 |

|July |76 |66 |86 |84 |14 |12 |16 |14 |

|August |79 |65 |87 |85 |13 |12 |14 |12 |

|September |73 |60 |79 |82 |17 |11 |11 |10 |

|October |61 |52 |73 |79 |14 |14 |10 |6 |

|November |52 |44 |60 |74 |10 |15 |5 |5 |

|December |43 |38 |48 |66 |7 |17 |7 |4 |

Source: World Book Encyclopedia

.cn

Information Services Department, Hong Kong SAG

Exhibit 11

Exchange Rates

Shanghai and Hong Kong

|Year |Hong Kong Dollars/ |China KMB/ |

| |U.S. Dollars |U.S. Dollars |

|1990 |7.8033 | |

|1991 |7.7732 | |

|1992 |7.7407 | |

|1993 |7.7237 |5.8199 |

|1994 |7.7386 |8.5103 |

|1995 |7.7341 |8.3336 |

|1996 |7.7352 |8.2995 |

|1997 |7.7451 |8.2797 |

|1998 |7.7458 |8.2784 |

Source: Pacific Exchange Rate Service, Pacific University of British Columbia

Exhibit 12

Development Plans in China

| |Shanghai |Hong Kong |

|Phase I Opening |2005 |2005 |

|Magic Kingdom Theme Park |220 acres |140 acres |

|Hotels |50 acres |30 acres |

| |(1800 rooms) |(1400 rooms) |

|Retail and Entertainment Center |30 acres |20 acres |

|Roads and Support Facilities |50 acres |40 acres |

|Total |350 acres |230 acres |

| | | |

| |Shanghai |Hong Kong |

|Phase II Opening |2010 |2010 |

|EPCOT Theme Park |200 acres |120 acres |

|Hotels |40 acres |10 acres |

| |(1500 rooms) |(1000 rooms) |

|Convention Center |40 acres |25 acres |

|Retail and Entertainment Center |30 acres |15 acres |

|Roads and Support Facilities |40 acres |30 acres |

|Excess |300 acres | |

| | | |

|Total Phase I + II |1000 acres |430 acres |

Exhibit 13

Disney in Asia

Financing Costs and Visitor Market Data

| |Shanghai |Hong Kong |

|Phase I | | |

|Construction Costs (Total) |$1.2 billion |$1.8 billion |

|Disney Portion |$150 million |$300 million |

|Capacity of Magic Kingdom Theme Park – |50,000 per day |35,000 per day |

|Phase I Plan |18,250,000 per year |12,775,000 per year |

| | | |

| |Shanghai |Hong Kong |

|Phase II | | |

|Construction Costs (Total) |$.9 billion |$1.5 billion |

|Disney Portion |$150 million |$250 million |

|Capacity of EPCOT Theme Park – Phase II |40,000 per day |25,000 per day |

|Plan |14,600,000 per year |9,125,000 per year |

| | | |

| |Shanghai |Hong Kong |

|Most Probable Expected Attendance (Phase I)| | |

|(2005) | | |

|Mainland China |9 million | |

|Local Hong Kong Area | |1.8 million |

|Visitors to Hong Kong | |3.4 million |

|Total Visitors |9 million |5.2 million |

| | | |

| |Shanghai |Hong Kong |

|Most Probable Expected Attendance (Phase |7 million |5 million |

|II) (2011) | | |

|Total Visitors |7 million |5 million |

| | | |

|Disney Royalties and Licensing Fees in each location |

| 10% of Entrance Fees |

|5% of In-Park Expenditures |

|3% of total revenues (management fee) |

|Plus: 35% of Profits or losses in Shanghai |

|40% of profits or losses in Hong Kong |

Exhibit 14

Operating Characteristics of

Magic Kingdom Theme Parks

and

Phase I Hotels

First Year of Operations (2005)

| |Shanghai |Hong Kong |

|Entrance Ticket Prices | | |

|Adult |$20 |$35 |

|Child |14 |25 |

|Average Ticket Price |$17 |$30 |

| | | |

| |Shanghai |Hong Kong |

|Food Expenditures per person |$6 |$15 |

|Souvenirs, Clothing, and Miscellaneous |$5 |$12 |

|Expenditures per person | | |

|Hotel Operations – Average Occupancy Rates |75% |80% |

|Average Room Rates |$95 |$185 |

| | | |

| |Shanghai |Hong Kong |

|Fixed Costs (in millions) | | |

|Depreciation Expense |$30 |$45 |

|Property Taxes (4%) |48 |72 |

|Salary Expenses |32 |25 |

|Other Fixed Expenses |18 |20 |

|Total |$128 |$162 |

| | | |

| |Shanghai |Hong Kong |

|Weighted Average Interest Costs |6% |7% |

|Variable Cost per Visitor |$10 |$17 |

|Variable Costs – Hotel Room per day |$50 |$100 |

|Corporate Tax Rate |25% |35% |

Exhibit 15

Operating Characteristics of

EPCOT Theme Park

and

Phase II Hotels

First Year of Operations (2011)

| |Shanghai |Hong Kong |

|Entrance Ticket Prices | | |

|Adult |$30 |$60 |

|Child |20 |40 |

|Average Ticket Price |$25 |$50 |

| | | |

| |Shanghai |Hong Kong |

|Food Expenditures per person |$9 |$30 |

|Souvenirs, Clothing, and Miscellaneous |$7 |$27 |

|Expenditures per person | | |

|Hotel Operations – Average Occupancy Rates |80% |85% |

|Average Room Rates |$115 |$230 |

| | | |

| |Shanghai |Hong Kong |

|Fixed Costs (in millions) | | |

|Depreciation Expense |$15 |$25 |

|Property Taxes (4%) |24 |40 |

|Salary Expenses |16 |14 |

|Other Fixed Expenses |14 |18 |

|Total |$69 |$97 |

| | | |

| |Shanghai |Hong Kong |

|Weighted Average Interest Costs |6% |7% |

|Variable Cost per Visitor |$15 |$25 |

|Variable Costs – Hotel Room per day |$70 |$140 |

|Corporate Tax Rate |25% |35% |

Exhibit 16

Cost of Capital Assumptions for

Phase I and Phase II

Operations

| |Shanghai |Hong Kong |

|Average Interest Rate on All Borrowings – |6% |7% |

|Net to the Operating Entity | | |

|Target Capital Structure | | |

|Debt |65% |60% |

|Equity |35% |40% |

|Local Corporate Stock Beta |2.0 |1.2 |

|Risk Free Rate |6 ½% |6% |

|Expected Return on Equities |14% |12% |

|Country/Political Risk Premium |4% |1 ½% |

|Expected Growth Rate in Earnings |5% |8% |

Exhibit 17

Proposed Financial Structures of the

Operating Company in Each Location

Phase I and Phase II

(in millions)

| | |Shanghai |Hong Kong |

| | | | |

|The Walt Disney Company Investment |Phase I |Phase II |Phase I |Phase II |

|Planning Expenditures |$100 |N/A |$75 |N/A |

|Equity in Each Venture |$150 |$150 |$300 |$250 |

| |Total |$250 |$150 |$375 |$250 |

|Debt | | | | | |

|Government Loans |$700 |$585 |$800 |$650 |

|Commercial Loans | | |$300 |$400 |

|Total Debt |$700 |$585 |$1.100 |$1.050 |

|Equity | | | | | |

| |Country |$350 |$165 |$400 |$200 |

| |Disney |$150 |$150 |$300 |$250 |

| |Total Equity |$500 |$315 |$700 |$450 |

|Total Capital |$1.2 billion |$.9 billion |$1.8 billion |$1.5 billion |

-----------------------

ENDNOTES

[i] The Walt Disney Company, Annual Report, 1998.

[ii] Statement by Michael Eisner, CEO of The Walt Disney Company, during a trip to China in January 1999, Knight-Ridder/Tribune Business News, 16 June 1999.

[iii] The Walt Disney Company, Annual Report, 1998.

[iv] Statement by Peter Dekom, attorney who advises media companies operating in Asia, “Disney’s China Policy,” Time Magazine, 9 December 1996.

[v] USA Today, 2 November 1999.

[vi] Faison, Seth, “…The Chinese May Not Come To Theme Parks,” The New York Times, 3 August 1999.

[vii] Stewart Toy, Ronald Groven, and Mark Maremont, “Mouse Fever is About to Strike Europe,” Business Week, 30 March 1992.

[viii] Steven Greenhouse, “Playing Disney in the Parisian Fields,” The New York Times, 17 February 1991.

[ix] The Wall Street Journal, 14 December 1998.

[x] Tara Suilen Duffy, “Hong Kong, Shanghai Vie for Disney Park Deal,” The News-Times, 17 April 1999.

[xi] National Census Report Number 5, National Bureau of Statistics.

[xii] The Wall Street Journal-& ................
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